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Toyota supplier says hello to chips, goodbye to cars

Sales of components for chip-making machines and robot parts are helping growth

Tokyo

NSK Ltd has been making transmissions and ball bearings for Japanese cars for half a century, but the 102-year old manufacturer is now undergoing a major shift as it supplies components critical to digital products and services.

Sales of components for chip-making machines and robot parts are helping to fuel earnings growth.

Operating profit from industrial products will grow 34 per cent this fiscal year to 38 billion yen (S$467 million), according to NSK's outlook, helping to make up for a 17 per cent profit decline in the automotive business.

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Demand for industrial components is being felt across the industry, with total orders for machine tools jumping 32 per cent in 2017 to a record 1.65 trillion yen, according to the Japan Machine Tool Builders' Association.

That's also benefited NSK competitors including THK Co and Nippon Thompson Co, which have seen their shares climb 52 per cent and 81 per cent since the end of 2016.

Tokyo-based NSK hasn't fared as well, declining about 6 per cent during the same period due to slower sales to carmakers.

Bloomberg spoke to NSK's Hiroya Achiha, deputy head of the industrial machinery division, and Kenjiro Kikuchi, general manager of precision machinery, about the transformation.

How is business?

Mr Achiha: "Last spring we simultaneously got hit with orders from various customers. Smartphone chipmakers, injection moulds, Chinese factories looking to automate with robots, 3D NAND memory producers, bitcoin miners. Suddenly everyone needed new chips and the machines to make those chips. That boosted demand for our ball screws."

But chips are nothing new. Why was this such a surprise?

Mr Kikuchi: "3D NAND memory is a new type of memory chip you can't manufacture with existing semiconductor machines. You need new machines, which resulted in an explosion of enquiries. And then China is seeing rising labour costs and the need to automate. Factories are making more precision products. All of this is boosting demand for our ball screws."

What does that mean for your forecasts?

Mr Kikuchi: "We could see another 10 per cent jump in revenue in precision machinery by March 2021. It could come by March 2020 or March 2022 depending on what our clients do. But we want to be ready to reach 70 billion yen."

Are you planning to boost output? Where?

Mr Kikuchi: "We're forecasting a 20 per cent bump in output for ball screws this fiscal year. We have 5 billion yen in new capital expenditures for our factories in Kyushu and Shenyang. We're increasing ball screw production lines, which will come on-line by the second half of this fiscal year. We've already doubled headcount to 1,400 people across both locations."

Will you be hiking prices again?

Mr Kikuchi: "We still need to keep hiring people and training them, so we're leaving ample room for higher expense costs."

Are you worried about global cooling demand for smartphones?

Mr Achiha: "Within smartphones we're seeing some slowing, given the iPhone X didn't do so well. And chips are also entering a little bit of a break. So we do see a slight drop in the short-term. But the amount of data the world is producing and the amount of chips being used is increasing.

"So we'll be watching the ebb and flow, but we see growth basically moving in the right-and-up direction and expecting growth over the medium-term."

What are the big trends to watch?

Mr Achiha: "We're all consuming and creating more data. Social media, YouTube, et cetera. And we see self-driving cars creating massive amounts of data which will need to be absorbed and then analysed. So if that takes-off globally, we'll need massive amounts of chips and data centers to process all that data. BLOOMBERG